June 22, 2025
Understanding the Proposed Tax Legislation: A Cautionary Approach to Tax Planning
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Article Highlights:
- Permanent Extension of the Increased Standard Deduction and Changes to Tax Rates
- Senior Bonus Deduction
- Adjustment to the Qualified Business Income Deduction (QBI)
- Estate and Gift Tax Exemption Enhancements
- Saver's Credit Adjustments
- “No” Tax on Social Security Income
- “No” Tax on Overtime
- “No” Tax on Tips
- Reinstatement of Bonus Depreciation
- Increased State and Local Tax (SALT) Deduction Limit
- No Tax on Car Loan Interest
- Termination of Clean Vehicle Credits
- Termination of Residential Solar Credit
- Termination of Energy Efficient Home Improvement Credit
- Termination of Certain Deductions
In recent months, legislative activity in Congress has spurred considerable discussion around the proposed One Big Beautiful Bill Act (OBBBA). This article explores the key components of the OBBBA House and Senate versions of the tax bill as deciphered from various Congressional documents and highlights the importance of cautious tax planning given the potential changes in the legislation by the time it is reconciled in Congress.
Key Provisions
Both houses of Congress have proposed several changes aimed at extending and enhancing tax benefits introduced under the Tax Cuts and Jobs Act (TCJA), which was enacted in 2017. Most of the TCJA changes are scheduled to expire at the end of 2025. Here’s a summary of some key provisions:
- Permanent Extension of the Increased Standard Deduction and Changes to Tax Rates: Proposals seek to make the standard deductions, which were increased under the TCJA, permanent. Furthermore, temporary enhancements are slated for 2025 through 2028, with an additional increase of $1,000 for individuals, $1,500 for heads of household, and $2,000 for married couples. The TCJA also temporarily modified the tax rates and brackets, including dropping the top rate from 39.6% to 37%, and indexed the bracket thresholds for inflation. The 2025 legislation would make permanent the TCJA’s income tax brackets and modifies the indexing methodology.
- Senior Bonus Deduction: Under current law, up to 85% of Social Security benefits could be taxable, depending on the recipient’s other sources and amounts of income. The legislation aims to reduce the taxation of Social Security benefits for years 2025 through 2028 by providing those age 65 and older an additional $4,000 or $6,000 standard deduction amount, reduced when modified adjusted gross income exceeds $150,000 for married couples ($75,000 for others).
- Adjustment to the Qualified Business Income Deduction (QBI): The bill proposes increasing the QBI deduction, sometimes referred to as the Sec 199A deduction, from 20% to 23% and making these changes permanent. The phase-in limitation mechanics are revised for simplification.
- Estate and Gift Tax Exemption Enhancements: The unified estate and gift tax exemption will see a permanent increase to an inflation-indexed $15 million.
- Child Tax Credit Modifications: Scheduled enhancements temporarily increase the child tax credit from $2,000 to $2,200 or $2,500 per qualifying child through 2028 before reverting to $2,000, starting in 2029. Additional modifications pertain to indexing, refundability, and Social Security number reporting.
- Saver's Credit Adjustments: Modifications to the Saver's Credit are geared towards encouraging more savings among lower- and middle-income families. The law establishes a permanent inclusion of contributions made to ABLE accounts for the beneficiary who is the account's designated recipient, effectively treating these contributions similarly to those made to more traditional retirement accounts.
- “No” Tax on Overtime: The legislation creates an above-the-line deduction for overtime premium pay. Both the House and Senate bills limit the deduction in different ways to lower income taxpayers.
- “No” Tax on Tips: The tax bill introduces a new above-the-line tax deduction for qualified tips received by individuals working in occupations where tipping is customary. The tips must be voluntarily given, not negotiated, and determined solely by the customer. The deduction is not allowed to highly compensated individuals.
- Reinstatement of Bonus Depreciation: A full reinstatement of the 100% first-year depreciation deduction is proposed for business property placed in service between 2025 and 2030.
- Increased State and Local Tax (SALT) Deduction Limit: This is a bone of contention between the House and Senate, with proposals making the SALT deduction as high as $30,000 but phasing out the increase over the existing $10,000 limit for higher-income taxpayers. These changes would be permanent. This expansion is substantial, as it can potentially aid numerous taxpayers previously limited by the TCJA's deduction cap.
- No Tax on Car Loan Interest: Would allow taxpayers to deduct up to $10,000 in interest paid on auto loans for vehicles assembled in the U.S. for years 2025 through 2028. The deduction would phase out for taxpayers with an AGI of $100,000 ($200,000 for married individuals filing jointly).
- Termination of Clean Vehicle Credits: The legislation would terminate the tax credit for purchasing both new and previously owned clean vehicles after 2025. There is an exception for manufacturers that have not sold 200,000 new clean vehicles as of December 31, 2025, to qualify for the credit in 2026.
- Termination of Residential Solar Credit: The legislation would terminate the tax credit for solar electric, solar water heating, fuel cell, small wind energy, geothermal heat pump, and battery storage property generally after 2025.
- Termination of Energy Efficient Home Improvement Credit: The legislation would terminate the 30% tax credit for household energy efficient improvements.
- Termination of Certain Deductions: The deduction for personal exemptions is permanently repealed. The new law would make permanent the current restrictions on miscellaneous itemized deductions.
There are more, but these are the key issues affecting most taxpayers.
It is imperative for taxpayers approach these prospective changes with caution. They are still in the “proposed” stage, with the House and the Senate still negotiating the final legislation. The final reconciled version of the OBBBA is expected in July. If you have questions, please contact this office.
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